Why are international companies increasingly looking at buying British firms?

Business Leader contributor Patricia Cullen examines the ongoing trend for international firms to buy UK companies. Is it a sensible strategy? Why do fewer US, German and Asian firms sell out? And what do these acquisitions generally mean for shareholders, customers and employees?

The UK boasts a dynamic, hospitable market. Europe’s third-largest economy, on track to become the continent’s largest by 2030, is a destination for international investors. Flush with capital, the funds have gone bargain hunting, snapping up everything in the UK, from supermarkets to defence companies.

The US-UK economic affiliation has been a success story for decades. Thousands of US companies, large and small, call the UK home, and regardless of the ongoing challenges of the UK-EU relationship, multi-billion-pound investment trends continue to point to overall global confidence toward UK companies.

Globalisation encourages increased inflows and outflows of capital, and UK-based companies are the go-to for overseas investors. But what is driving this trend?

According to Prof. Dr. Christopher Kummer, President of IMMA, there are a variety of reasons: “First of all, high share prices always drive or coincide with deal activity. Second, low interest rates contribute as well. Third, the positive economic outlook helps and the GDP forecast is very positive. Fourth, Brexit has actually taken place and any potential effects are now known. Last but not least, it also seems to be clear how COVID-19 may be handled going forward in the UK.”

UK set to have fastest economic recovery

Recent forecasts show that the UK economy could post one of the fastest economic recoveries post-COVID-19, and there is a major international investment summit planned in October to attract even more overseas investment in a post-Brexit Britain. The total value of mergers and acquisitions (M&A) activity taking place across the UK has gone up significantly in the second quarter of 2021 compared to the first, as lockdown restrictions eased. Recent figures show that foreign private buyers have spent more acquiring UK-listed business in the last eight months than they have in the last five years combined.

While the COVID-19 pandemic saw private equity (PE) firms press pause on spending, now they have excess cash to deploy, spending almost £25bn on British firms between the start of 2021 and mid-August, compared with £28bn for the whole of 2020, according to Dealogic. And the buying spree continues to pick up pace.

According to the Office for National Statistics (ONS), the total value of inward M&A was £27.7bn in Q2, £19.4bn more than the previous quarter. Ultra Electronics Holdings, Avast, Meggitt, Wm Morrison Supermarkets and Sanne Group are among those receiving bids in recent months.

The UK stock market is now trading at a 50% discount relative to the US compared with about 11% five years ago, according to the MSCI UK index metric. John Farrugia, Managing Partner of finnCap Cavendish, comments: “Sharp falls in share prices of several listed companies have made them an attractive prospect to foreign investors. Whilst the recovery in market valuations has been marked, and public market investors have been buoyed by considerable inflows that they have in turn deployed to support listed companies, the UK market valuations remain broadly beneath those of global peers.”

He elaborates: “This is in part, at least, attributable to the continuing Brexit drag as the UK recalibrates itself. The buyout industry, particularly in the US, is increasingly targeting the UK for other reasons too such as the UK’s pro-business environment as well as the confidence driven by the UK rapid vaccine rollout.”

Significant premiums are being paid

This increased demand and competition for UK-listed companies has resulted in significant premiums being paid by successful bidders. UK companies and start-ups are selling to larger US companies – including Shazam, snapped up by Apple for just under £300m, the trading and investment software firm Fidessa bought by the Temenos Group AG for a cool £1.3bn, Snap’s buyout of smart glasses maker WaveOptics, and Etsy buying used-clothing marketplace Depop.

Lower valuations due to COVID-19 or Brexit provide strong opportunities for PE firms to add value to businesses, as well as increasing returns for their investors, and the UK continues to be an attractive investment destination.

A third of the FTSE250 is owned by North American companies. Aside from attractive prices, what else encourages foreign buyers to the UK?

On the regulatory front, the UK appears to be more flexible than other major European nations. Wm Morrison’s takeover by a buyout firm went ahead without triggering government intervention, whereas France vetoed Carrefour’s merger with Couche-Tard.

Business Secretary Kwasi Kwarteng has just referred a potential takeover of Perpetuus, a Welsh materials firm supplying graphene, by Taurus International, a UK entity backed by Chinese investors to the Competition and Markets Authority.

He also recently intervened on a potential bid for defence company, Ultra Electronics, on national security grounds. However, these instances are few and far between.

Impact of Brexit

Furthermore, Brexit has not been the deal breaker we feared it would be. The UK continues to be a lucrative host country despite leaving the EU, according to the latest Mergers and Acquisitions Attractiveness Index Score, compiled by the Mergers & Acquisitions Research. The latest data covering 2020 reveals that the UK has risen two places in the global year-on-year rankings to fifth in the world, and third in Europe, only behind Germany and the Netherlands.

This on-going confidence is largely thanks to the UK’s suspected strength in infrastructure and assets as well as technological competencies. Compared to their US counterparts, UK businesses are cheap, and, if as suspected the British economy moves on swiftly from COVID-19 and Brexit, it is the place to be (and buy).

Low valuations, cheap financing and a favourable regulatory backdrop make the UK a hotbed of global deal making. PE has a strong track record of supporting and reinvesting in businesses during times of economic difficulty, and as evidenced in ‘Private Equity and Financial Fragility during the Crisis’ by Harvard Business School – PE-backed companies experienced higher asset growth and increased market share during the crisis.

An expert in public takeovers, Adam Cain, Pinsent Masons LLP, anticipates an increase in competitive and hostile takeover activity in the next 18 months.

He claims that this growth will come about, “particularly from sophisticated market participants that are seeking to acquire UK listed companies which they consider represent a strong value proposition.”

He adds: “Private equity funds are demonstrating a strong degree of interest in UK-listed companies and, with large amounts of capital to deploy, they will remain an active part of the UK’s public M&A landscape.”

What does all this mean for staff and shareholders?

While the effect of M&A activity on the economy is well versed, what does it mean for shareholders, staff and customers? M&As reveal several key legal, business, human resources, intellectual property and financial questions and concerns, and a change of control for a company will often affect not only shareholders, but also employees participating in its various share plans.

Kummer continues: “Shareholders of companies that are acquired will benefit for sure.”

He emphasises the importance of a consistent strategy and clear M&A processes in advance integration planning and trainings, bringing the right capacity and qualification of people to benefit from transactions.

Despite the inherent benefits, the impact of M&A on employees can be taxing. Poor employee management can crumble a company, irrespective of how many new assets it has acquired or how much money it’s saving. Approximately 30% of employees are deemed redundant when firms in the same industry merge, according to Surviving M&A, by the Harvard Business Review. While a certain amount of unease is unavoidable, communication about new roles and lay-offs will minimise uncertainty.

The UK Takeover Code requires a very detailed disclosure of a buyer’s intentions on specified matters, such as their goals for pension schemes of the target company, alongside their plans for employees. These responsibilities will further help protect staff.

Cain adds: “This requirement seeks to ensure that key stakeholders have a clear understanding of a bidder’s strategic plans for a target company. Over the course of the next 18 months, I expect to see an increased focus on intention statements from employee representatives who may seek to ensure that a bidder’s intentions are as specific as possible in order to safeguard the interests of employees.”

Laura Hoy, Equity Analyst at Hargreaves Lansdown, understands the concerns around staff security and shareholder value: “Private equity buyouts have a reputation for purchasing an undervalued company and boosting returns in some rather undesirable ways. That can be by stripping assets, loading up the balance sheet with debt, or renegotiating
workforce contracts.”

However, it’s not all doom and gloom.

She continues, “Ultimately, the goal of any private equity company is the same as the wider market – to pump up profits. Buyouts tend to be good news for existing shareholders as well, as they’re typically paid a premium for an underperforming company.”

Cornelia Andersson, Head of M&A and Capital Raising at Refinitiv, an LSEG company, echoes this stating: “Generally, the guiding star for any corporate acquisition is an increase in value for shareholders so this should be good news for UK businesses. For staff and customers, there is often benefit in scale such as being able to tap into resources, services and locations of a larger organisation.”

She goes on to say: “A larger organisation can often offer more extensive, comprehensive benefits to its staff than a smaller company. For the customer, integration with expanded production facilities, distribution or retail networks, shared use of other resources, often means a broader product portfolio and may lead to a reduction in cost.”

Is the UK a sell-out compared to other economies?

The reasons countries like France, the US and South Korea still have many of their own companies but the UK doesn’t, has been years in the making. What impact will this ownership crisis have?

Alison Owers, Global CEO at Orient Capital, reveals: “Privatisation in the UK has been a large driver of the current global ownership landscape, as many of our big public companies have been taken private over the last 40 years. In Europe and Asia there is more state ownership, and a slower or near non-existent privatisation push. We must exercise caution when it comes to value judgements here – one strategy is not necessarily better or worse than another, and a thriving global economy should benefit everyone.”

Other countries may be taking note, as France begins to loosen its corporate governance laws. However, anxieties remain.

While foreign investors are not prohibited from acquiring shares in a Korean company, there are limits on foreign ownership in Korean companies engaging in certain industries considered to be vital to the national interest, such as defence, broadcasting, telecommunications, publishing and public utilities.

Andersson continues: “The active M&A market in the UK indicates the positive view that investors and corporates have of the UK. Following on from a bleak outlook in the wake of Brexit and the pandemic, foreign buyers are displaying a vote of confidence with not only their feet, but also their wallets.

“An influx of capital may well give struggling UK businesses the boost they need to continue to expand and grow. In terms of private equity backed transactions, financial sponsors have historically been adept at creating efficient, successful businesses that generate value to the local economy as well as shareholders.”

The UK economy is going from strength-to-strength and the country’s M&A outlook for the remaining months of 2021 looks positive, with a combination of pent-up demand and years’ worth of would-be transactions working out.

Whilst Brexit has certainly created uncertainty, the underlying strength of UK businesses means there continues to be great investment opportunities for overseas investors.

A British Private Equity & Venture Capital Association (BVCA) spokesperson concludes: “Private equity’s willingness to invest in UK firms is overwhelmingly positive. Not only does it bring value and long-term support to the companies it invests in, creating jobs up and down the country, it’s a vote of confidence in both our economy and the UK as a place to build strong businesses.”